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PURCHASES AND PAYMENT CYCLE - Coggle Diagram
PURCHASES AND PAYMENT CYCLE
Weakness and Risk
It is a weakness if no approved supplier list exists and creates the risk that substandard materials can be ordered at exorbitant prices without the necessary control. It creates the risk of nepotism and fraudulent purchasing procedures. It is therefore recommended that an approved supplier list exist and any changes to the list should be approved by senior management
Internal Controls
Payments
Validity
Cheque payment requisition, creditor's statement, creditor's recon, PO, GRN, DN from supplier and invoice
Authorization
Payments by means of cheque requisition
Authorized by senior official
2 Signatories review & cancel supporting docs before approving payment
Accuracy
Individual creditors recons prepared
Serve as supporting docs for payment
All cals reviewed by independent person
Completeness
Creditors control account kep up to date in general ledger
Regularly reconned with creditors leder
Payment advice recorded numerically
Missing numbers followed up
Recording
Posted from payment advice to individual creditors account
Total to creditors control account
Classification
Payments coded according to the creditor's number
Cut off
All payment recorded in correct period in respect of date of the cheque
Purchases
Accuracy
Invoices independently checked for mathematical accuracy
Prices ompared with PO and price list
Quantity checked on GRN
Accounting accuracy checked
Purchase journal from invoices
Recording
From purchase journal
Creditors account in creditors ledger
purchase and creditors control account in general ledger
Creditors control account regularly reconed with list of creditors
Completeness
Supporting docs recorded numerically
Missing numbers followed up
GRN & DN matched
Register of unmatched invoices
Classification
Inter-group purchases are clearly distinguished by code number
Seperately recorded
Authorization
PO - purchasing department/buyers only
Authorized by purchase manager
Cut off
Purchase journal updated from invoices iro date of delivery
Validity
Purchase requisition, PO, GRN, DN from supplier, Invoice, Credit statement
Documents
Purchases
Ordering Function
List of approved suppliers
Supplier price list
Requisitions
Purchase Orders (PO)
Receiving Function
Supplier delivery notes (DN)
Goods received note (GRN)
Copy of PO
Recording Function
Supplier invoice
Copy of the PO's
Copy of the GRN
Purchase journal
DN from supplier
Credit Notes
Payments
Bank statements
Remittance advice
Cash payments journal
Cheques
Substantive Procedures
Timing
Mostly after year end
Can be forced at interim date
Extent of testing
Function of the assessed risk of material mistatement & results of test of controls
Nature
Test of detail / Transactions
Purchases
Occurrence
The recorded transaction has occurred and it pertains to Company XYZ
Accuracy
The amount of the purchase has been recorded appropriately
Cut off
The purchase has been recorded in the correct accounting period
Classification
The purchase has been recorded in the proper accounts
Completeness
All purchases that should have been recorded have been recorded
Payments
Occurrence
Obtain invoice supportin payment and inspect to confirm
Correctly made out
Is for goods normally used
Inspect authority for payment
Accuracy
The amount of the payment has been recorded appropriately
Cut off
The payment has been recorded in the proper accounting period
Classification
The payment has been recorded in the proper accounts
Completeness
All payments that should have been recorded, have been recorded
Analytical procedures
Trade and other payables
Accuracy, Valuation and Allocation
Trade payables are included in the financial statements at appropriate amounts and related disclosures have been appropriately measured and described
Completeness
All trade payables and accruals which should have been recorded have been recorded and all relevant disclosures that should have been recorded have been recorded
Existence
Trade payables in the balance actually exists and is not fictitious
Classification
Only amounts payable to trade creditors with in twelve months have been included in the account.
That the balance on the account does not include amounts which should not be included, for example short term borrowings, provisions, bank overdraft.
Obligations
Trade payables represent obligations pertaining to the company
Presentation
Inspection of the notes to the financial statements
Functions
Purchases
Receiving Function
Receipt of goods
Inspect against PO before signed
Quality
Quantity
Type
Details of goods received
Goods received note (GRN)
PO number
Date received
Quantity
Description of goods
Details of receiver
Damaged goods
Return to supplier
Departments notified
NOT accepted
Recording Function
Invoices received
Approved & checked for accuracy
Quality, type, quantity & date to GRN & DN
Price, terms & account details to agreed PO
Calculations of the invoice
Recording of purchases
Purchase journal
Supplier's name
Statement from supplier
Disputed invoices
Kept seperately
Followed up by senior member
Goods returned
Sent back to supplier
Credit note
Ordering Function
Purchsing policy
Re-order levels
Purchasing requisition
List of approved suppliers
No deviation
Authorization by senior
Any changes
Purchase Orders:
Discounts
Terms of payment
Price
Delivery address
Description of goods
Quantity
Signature - Buyer/purchase department
Name of supplier
Sequentially numbered
Authorized - purchasing manager
Issued in triplicate
Supplier, receiving department, copy kept in deliveries pending register
Seperate purchasing department
Payments
Cheques
Controls over cheque forms
Cancelled cheques marked
Sequentially numbered
Filed numerically
Cash cheques discouraged
Crossed with "not transferable"
Drawing and signing of cheques
Presented for authorization
supporting docs
Docs inspected and marked as paid
prevent re-submission
Signed by 2 signatories
Recording of payments
Independent of those drawn, sign or handeling cheques
Returned cheques
Accounts payable records
Control account inaccessible
Individuals responsible for maintenance of accounts payable sub-ledger
Regular recons
Independent person
Individual creditor's recon produced monthly
EFT's
See Unit 1
Test of Controls
Purchases
Accuracy
Select samples of invoices and inspect:
Prices same as on PO and price list
Quantity agree on GRN
Re-perform mathematical accuracy
Purchase journal & invoices detail match
Recording
Select sample of entries in purchase journal
Trace postings to creditors account in creditors ledger and...
purchase and creditors control account in general ledger - inspect detals are the same
Select sample of creditors recon and inspect whether supporting docs and record agree
Signature of managmenet as review
Completeness
Select samples of supporting docs and inspect numerical recording
Inspect signature of missing numbers being followed up
Select samples of credit notes and match with GRN & DN
Select samples of entries in register and inspect signature of unmatched invoices being followed up
Classification
Select samples of purchases and inspect - correctly classified
Authorization
Select samples of POs - inspect for signature of buyers
Select samples of PO's and inspect for signature of purchase manager
Cut off
Select sample of GRN's dated before and after year end.
Match GRN with invoices
Inspect purchases are recorded in correct accounting period based on date of delivery
Validity
Select a sample of purchases and inspect whether it is supported by: purchase requisition, PO, GRN, DN from supplier, Invoice, Credit statement
Payments
Validity
Select sample of payments from creditors account and inspect whether it is supported by:
Cheque payment requisition, creditor's statement, creditor's recon, PO, GRN, DN from supplier and invoice
Authorization
Select samples of paments from bank statement
Match to cheque requisition - details are the same
Inspect for 2 signatures approving payment
Inspect supporting docs cancelled?
Accuracy
Select samples of individual creditors recons
Re-perform mathematical accuracy
Compeare entries to source docs
Inspect for reviewer's signature
Completeness
Select sample of creditors recons and re-perform accuracy
Select sample of payment advices - inspect numerical sequence
Inspect signature for proof of following up on missing numbers
Recording
Select samples from payment advices - follow entries to individual creditors account & creditors control account
Inspect that details match
Classification
Select sample of payments - inspect its been posted to correct creditors account
Cut off
Select payment before and after year end - follow to creditor's account & inspect whether recorded in correct period in respect of date of the cheque
Control Objectives
Purchases
Accuracy
All orders are carried out accurately. All purchase transactions are accurately recorded at the correct quantity, at the correct amount and are arithmetically correct
Recording
All purchase transactions are correctly recorded
Completeness
All valid purchase transactions are recorded and nothing is left out
Classification
All purchase transactions are correctly classified according to the nature thereof
Authorization
All purchases are authorised according to company policy
Cut off
All purchase transactions are recorded in the correct reporting period
Validity
All recorded purchases are valid and supported by proper documentation
Payments
Validity
All payments on creditors accounts are valid and are supported by proper documentation
Authorization
All payments are authorised according to company policy
Accuracy
Payments are made at the correct amount and is arithmetically correct
Completeness
All valid payment transactions are recorded and nothing is left out
Recording
All payment transactions are correctly recorded
Classification
All payments classified to the correct creditors account
Cut off
All payments recorded at date of payment per payment advice and date of cheque